Used cars stopped getting more expensive in June

·Head of News

Fri, Jul 9, 2021, 2:11 AM2 min read

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Friday, July 9, 2021

Another major source of inflation pressure eases

It started with lumber.

And now used cars have followed.

The Manheim Used Vehicle Value Index published Thursday showed the price of used vehicles dropped 1.3% in June compared to the prior month. This marked the first month-on-month decline in prices since December.

After five straight months of sharp increases, used car prices stopped going up in June, providing potential relief to inflation data. (Source: Manheim)

To be sure, used car prices compared to last year are still quite elevated: in May, prices were up 34.3% year-over-year.

But when the May consumer price report was published last month, the data showed inflation rising at the fastest pace since the 1990s. The idea that inflation would be "transitory" — as has been argued by the Federal Reserve and some economists — seemed to be challenged by this multi-decade superlative.

That data, however, was driven in large part by the uptick in just a few categories.

As Bespoke Investment Group strategist George Pearkes noted at the time, about half of May's increase in prices could be attributed to just four categories, which account for just under 6% of the entire price basket: used cars, rental cars, hotels, and plane tickets.

All four of these categories, of course, are under pressure because of re-opening related trends. But these pressures can't and won't last indefinitely. And neither will the price increases that follow these demand booms.

Rental car spending, for instance, has moderated as the price for securing a vehicle soared through the spring, as this chart from Deutsche Bank shows below. Used cars also show there is a limit to the price consumers will pay.

Spending on rental cars dropped in the spring as price increases proved too steep for many consumers amid a crush of demand for summer travel. (Source: Deutsche Bank)

When June inflation data is released next week, we are certain to have another round of debates about the transitory narrative facing pressure, if inflation readings again markedly exceed 2%. Wall Street's current forecast suggests "core" CPI — which is preferred by policymakers and excludes the costs of food and energy — will rise 0.4% month-on-month, and 4% over June 2020.

Earlier this week, however, we flagged signs from service sector surveys that pricing pressures aren't exactly easing, but have at least stopped getting more acute.

As we wrote then, and will reiterate here, a slowdown in the rate of change is precisely what the transitory argument calls for. And the categories experiencing this dynamic continue to grow.

By Myles Udland, reporter and anchor for Yahoo Finance Live. Follow him at @MylesUdland